Financing Performance Contracting

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Financing Performance Contracting

• Frank Shepard, PE Siemens
• Outreach Chair Energy Services Coalition
• Shari Harris, Associate Vice President for
  Finance/Capital Projects UNC GA
• Gary Jones, VP SunTrust Bank
• Len Hoey, Program Director, NC SEO
• Tim Romacki, Director, Debt Management Section,
  State Treasurers Office

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Financing Performance Contracting

• The Energy Services Coalition (ESC) is a national
  nonprofit organization composed of a network of
  experts from a wide range of organizations
  working together at the state and local level to
  increase energy efficiency through energy
  performance contracting. 

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• Performance Contracting is a procurement method
  GS 143-64.17
• It enhances the Capital Budget with a portion of
  the Operating Budget going forward

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• A building, a boiler, a chiller, in an essential
  use system creates a demand for energy for the
  asset life.
• In financial terms, you are then in a SHORT
  position on Energy until you make a purchase.
• Operating Budgets are used to make the purchase
  for energy each year.
• Financing for Performance Contracting locks in
  the guaranteed savings portion of that operating
  budget for the term of the agreement.
• When is this good? Bad?

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Sample Cash Flow
Current
Each Year During the Contract
After the Contract
Capital
Cash Flow
Cash Flow
Maintenance
Debt Service
Maintenance
Maintenance
Utilities
Utilities
Utilities
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Financing Performance Contracting

• Local Government
• Cities and Counties
• K-12 Schools
• Community Colleges
• State of NC
• Agencies
• Universities

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Key Drivers for the University of North Carolina

• PACE Presidents Advisory Committee on
  Efficiency and Effectiveness
• UNC Tomorrow
• SB 668 ( G.S. 143-64.12)

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Financial Approval Process
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SunTrust Equipment Finance Leasing Corp.
Gary Jones (P) 410.307.6661 (F)
410.307.6620 gary.jones_at_suntrust.com

• Energy Project Financing from the Bank Point of
  View

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About SunTrust Banks, Inc.

• With 190 billion in assets, SunTrust Banks, Inc.
  (SunTrust) is one of the nations largest and
  well-capitalized bank holding companies
• Corporate Rating A1, A
• Bank Rating Aa3, A
• Well-diversified platform offering a full range
  of financial products and services Retail and
  Commercial, Investment Banking, Wealth and
  Investment Management and Mortgage
• Serves a broad client base including retail,
  business, and institutional clients
• About SunTrust Equipment Finance Leasing Corp.
• SunTrust Equipment Finance Leasing Corp.
  (STEFL) is an indirect wholly owned subsidiary of
  SunTrust
• 7th largest bank equipment financing company with
  7 billion in assets
• Full service staff of 135 employees providing
  sales, credit risk management, equipment
  management, documentation, and accounting
  functions
• Offers a variety of equipment financings
  structures in the commercial and public sector
  markets
• Nationwide calling effort

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Overview

• One of the largest providers of equipment,
  facilities, project and infrastructure financing
  for the public sector
• Closed 1.5 billion in new business volume in
  2008
• A full service provider, offering underwriting,
  documentation and funding services
• Provides financing for essential-use equipment,
  facilities, energy and infrastructure projects
• Serving public sectors entities in all 50 states,
  including

• Institutional - public and private 501(c)(3)
• Colleges and universities
• Hospitals

• State and local governments
• Cities/Counties/Townships
• Fire and Water Districts
• Housing Authorities
• Port Authorities
• School Districts
• Special Districts
• State Agencies

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Equipment Projects Financed

• Energy Project Types
• Energy equipment upgrades/retrofits
• Central plants
• Heating and cooling equipment
• Lighting
• Solar and wind generation systems
• System controls
• Water meters
• Infrastructure improvements
• Waste/water treatment plants
• Any essential-use public sector project

• Equipment, Facility Project Types
• Capital equipment and technology
• Aircraft and helicopters
• Computer hardware and software
• Police, fire and EMS vehicles
• 911 systems
• Facilities
• Administrative facilities
• Courthouses
• Faculty and student housing
• Jails
• Schools
• Infrastructure improvements
• Roads, bridges, highways

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Industry Trends

• More stable rate environment
• Rates increased rapidly during 2008
• Recently, rates have fallen slightly and are
  leveling off
• Annual market for energy efficiency is estimated
  to be 200 bn1
• Lease financing in the energy market increased
  nearly 50 in 20082
• Tighter capital and credit restrictions lenders
  are more selective
• Many lenders have temporarily or permanently
  exited the tax-exempt market
• Lenders cost of funds have increased over the
  last year
• 20 year terms are becoming scarce or expensive
  norm is 15 years
• Limited number of lenders with the expertise or
  credit appetite to finance energy projects

1 The American Council for an Energy Efficient
Economy 2 2008 Survey of Equipment Finance
Activity, Equipment Leasing and Finance
Association
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Types of Structures
Most Common Structure

• Tax-exempt Lease Purchase
• Bonds
• Private Placement Bonds/Notes
• General Obligation
• Revenue Pledged
• Public Bonds
• Tax-Exempt Lease Purchase
• Standard Terms and Conditions
• Repayment is subject to annual appropriations
• Public Agency has title
• Lender takes security interest on energy savings
  retrofits and equipment
• Terms up to 15 years (10-15 years typically)
• Fixed rate
• Proceeds funded into escrow

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Benefits of Tax-Exempt Lease Purchase Financing

• 100 financing
• Competitive fixed rates, with rate lock options
• Very low cost of issuance
• Flexible payment options that can be structured
  to match project savings
• Preserves cash and bonding capacity
• Match useful life of asset to financing term
• Simplified documentation
• Short and straightforward closing process
• May already be leasing equipment (add energy
  project to existing Master Lease)

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Financing Process
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Choosing the Right Financing Partner

• Financial strength and stability
• Bank and non-bank qualified investment appetite
• Broad product offering with solutions tailored to
  your needs
• Experience working with ESCOs
• Knowledgeable in laws and regulations specific to
  your locale
• Full-service organization supporting each step of
  the financing process to ensure seamless
  execution
• Ability to expedite funding through prompt
  decision making and streamlined financing process
  

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• Lending (Investment) Issues and Considerations
  the Banks View
• Lead time between concept to contract affects
  lenders structuring and APR forecasting ability.
• Energy Performance Contracts provide soft
  collateral to support a secured loan request.
• Lenders are becoming more discriminating with
  regard to which projects are attractive.
• Depending upon who the borrower is, lenders may
  extend larger dollars for longer terms.
• Lower rated borrowers and/or longer finance
  terms demand higher credit risk and term risk
  premiums resulting in higher finance rates.
• Previewing the credit is critical to how a
  transaction is priced. (i.e. a strong private
  college may qualify for a similar borrowing
  rate/term as rated public entity)
• Lenders desire that a project fully cash flows
  meaning the Energy Savings Guaranty covers the
  annual debt service. (in cases of stronger
  credits, shorter terms or firm term
  documentation the debt service may be able to
  exceed guaranteed savings)
• Lenders are structuring so that every dollar of
  energy savings is applied to debt service in
  order to shorten the lending term.

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From a Buyers (Borrowers) Perspective

• Putting together a credit sound project
• Choose an ESCO with industry experience.
• Negotiate a project where pro forma projected
  savings cover financing costs.
• Allocate annual savings to debt service to
  shorten the finance term (to the extent allowable
  under existing law).
• Require a Payment and Performance Bond during the
  construction/installation phase of a project.

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From a Buyers (Borrowers) Perspective

• Soliciting Financing Bids
• Who controls the finance bid process? Borrower
  or ESCO. There are advantages to either.
• Who is your Lender? Understand whether bids
  received are from Funders or Intermediaries. The
  number of lenders for projects with finance terms
  exceeding fifteen years are becoming fewer and
  more expensive. Transaction risk is lowest when
  a borrower working directly with funding source.
• What options for documentation are available?
  Understand Appropriation risk to Lender, Escrow
  situation, etc.
• Is the Bid Rate really valid through a future
  targeted funding date? Understand bidders
  various interest rate locking and interest rate
  indexing methodologies. Funding Sources are
  finding it more difficult in the current funding
  markets to hold a fixed interest rate quote for
  decision periods longer than two to five days
  without at least a verbal award to lock down
  funding costs.

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Questions and Comments